Equity grants to target CEOs during deal negotiations

I investigate the determinants and consequences of granting equity to the target's Chief Executive Officer (CEO) during deal negotiations. These negotiation grants likely reflect information about the acquisition, benefit from the deal premium, and provide more timely bargaining incentives. I find that CEOs are more likely to receive equity during negotiations when they negotiate for the target, particularly when the target has more bargaining power. This suggests that boards use equity to enhance bargaining incentives for CEOs with the most influence over deal price. I find limited evidence that negotiation grants are used as compensation and no evidence that they have a material adverse effect on shareholders.

► Target CEOs receive equity during merger negotiations in about one-third of deals.
► Boards are more likely to grant equity to CEOs with more influence over negotiations.
► Less independent boards appear to use equity grants to compensate target CEOs.
► Negotiation grants to CEOs are not associated with adverse effects on shareholder wealth.